400 Million Bushels!

The Jan. 10 U.S. Department of Agriculture ending stock report for corn came in 400 million bushels shy of expectations.

Starting with the summer of 2010, U.S. corn producers have been dealt three years of adverse growing conditions, causing production to come up short of expectations. Hot night time temperatures during the key pollination period of 2010 cut national corn yield to 152.8 bushels per acre (bpa). The hot summer of 2011 continued this trend, decreasing national corn yield to 147.2 bpa. The grand finale came in the form of extremely high temperatures and a drought ensnarling the Midwest in the summer of 2012, causing a huge drop in average national corn yield to a mere 123.4 bpa. To put that in perspective, the trend line yield – the expected yield under “normal” growing conditions – for 2012 was 166 bpa. Not surprisingly, these long-lived adverse conditions led to three years of extremely high corn prices, allowing the market to slow demand to prevent the United States from literally running out of corn.

Fast forward to February 2013. During this time of year, revenue-based crop insurance policies are typically finalized. The revenue level is established by using historical yield data combined with the average price of new crop (December) corn futures during the month of February. Taking into account the previous three years of shortages, the market has been incentivizing producers to plant more corn, and the revenue-based crop insurance price reached $5.66. This allowed producers to insure very favorable profit margins on corn acres, pushing farmers in the spring of 2013 to plant the largest number of corn acres in the United States since 1936. While Mother Nature did not cooperate, hitting Iowa and Minnesota with heavy rains during early spring planting and reducing spring-planted acres by 2 million, total acres planted were still near record highs. This was in part due to fringe areas of the Corn Belt adding significant acres. For the rest of the year, the weather was relatively cooperative, leading to a record national corn harvest in the fall of 2013.

Going into the January 2014 USDA report, the talk in the corn market was of 2013 corn production being revised higher, stagnating demand, and U.S. corn ending stocks coming in near a comfortable 2 billion bushels. And at the time, there seemed to have been logic behind this figure: it was well over double the previous year’s ending stocks, and in line with the fact that it was hard to find traders who were optimistic about corn prices moving forward. The report did not play out as planned. U.S. corn ending stocks were estimated to be 1.6 billion bushels. That meant that 400 million bushels, or 20%, of the projected corn ending stocks were gone, with actual demand greatly exceeding expectations and a slightly lower national yield. Upon release of the report, the market reacted and corn futures rallied sharply.

Since then, the March corn contract has gradually added value ahead of the February crop report that is due to be released at 11 AM (CST) on Monday, Feb. 10. The average trade guess is that the USDA will forecast US ending stocks to be 25 million bushels lower from a month ago. Will the USDA come up with another major surprise this time around? It is unlikely that we repeat last month’s surprise results, but the market is definitely leaning bullish and tighter ending stocks are expected. Maybe we are in for a bearish surprise? I don’t know, but option volatility is cheap at current levels, rendering long option strategies a viable play ahead of the report on Monday that may lead to big price swings.

Pre-Report Estimates:

2013/14 Ending Stocks

Actual

Average Guess

Range

Last Month

Last Year

Corn

1.606

1.574-1.667

1.631

821

Doug Bergman, Vice President of Agricultural Derivatives at RCM Asset Management, began his brokerage career at Iowa Grain Company before moving on to a broker/analyst role at MF Global. Doug currently runs the agricultural trading desk at RCM Ag Services, providing trading and hedging solutions to commercial grain and livestock customers as well as speculative traders. Doug also provides his customers with timely research and analysis, and keeps an open line of communication to help answer questions or concerns. Doug Bergman can be reached at dbergman@rcmam.com.

TRADING FUTURES, OPTIONS ON FUTURES AND RETAIL OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES. YOU MAY LOSE ALL OR MORE THAN YOUR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.